Banking Market Structure and Macroeconomic Stability: Are Low-Income Countries Special?

Abstract

Does the structure of banking markets affect macroeconomic volatility and, if yes, is this link different in low-income countries? In this paper, we explore the channels through which the structure of banking markets affects macroeconomic volatility. Our research has three main findings. First, we study whether idiosyncratic volatility at the bank level can impact aggregate volatility. We find weak evidence for a link between granular banking sector volatility and macroeconomic fluctuations. Second, a higher share of domestic credit to GDP coincides with higher volatility in the short run. Third, a higher level of cross-border asset holdings increases volatility in low-income countries.